WW International, Inc.
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Good afternoon, and welcome to the Weight Watchers' Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. I would now like to turn the conference over to Corey Kinger, Investor Relations. Please go ahead.

[Corey Kinger:]

Thank you, Andrea. And thank you to everyone for joining us today for Weight Watchers International's fourth quarter and full year 2017 conference call. At about 4

[Mindy F. Grossman:]

Thanks, Corey. Good afternoon, everyone. And it's great to be speaking with you today. Our business has strong momentum and we have a bold new purpose and vision to become a leading global healthy living brand. On February 7, we shared that new vision with our global employee community at an event broadcast from Alice Tully Hall in New York City. We were glad that so many of you could join us via webcast and what a special moment it was to be joined on stage by Oprah Winfrey. We unveiled our company's new purpose. We inspire healthy habits for real life, for people, families, communities, the world, for everyone. Weight Watchers is a community of millions inspiring each other to build lives of health, joy and connection. We turn science into healthy life changing habits and we believe that health and wellness should fit into your life, not the other way around. So, we meet you where you are and we built our approach to work for your life. We will talk more about our vision, applying our purpose and our goals and bold new shortly, but first let me turn to our 2017 performance. 2017 was a terrific year for Weight Watchers with growth across all major geographic markets as we attracted more people to join us on their wellness journey. This momentum accelerated following our WW Freestyle program launch in December, driving growth at end-of-period subscribers up 23% year-over-year to 3.2 million. In addition to double-digit revenue growth, we expanded our margins and delivered high quality earnings growth for the year. On a year-over-year and constant currency basis, full year revenue was up 12%. Gross margin expanded 270 basis points and adjusted operating income was up 39%. Importantly, growth was global; with North America, Continental Europe, and the UK markets all showing revenue and profitability increases. Our strength is broad-based and driven by strong execution across all aspects of our global business, from social engagement to member experience, from marketing to tech and digital product capabilities. Nick will go into further detail on our financial performance shortly. The global response to our new program has been incredible. This is our most flexible, livable program ever. Building on our highly successful and effective SmartPoints system; we expanded zero Point foods from only fruits and vegetables to a list of more than 200 delicious satisfying foods, which encourage members to eat healthier. Clinical trial results are the best we've seen for a Weight Watchers program. In a six-month University of North Carolina Weight Research Lab Study, on average, participants achieved an impressive weight loss of 7.9% after six months. In addition, over 90% of participants agreed that WW Freestyle helps them feel healthier. These WW Freestyle results are resonating within the Weight Watchers community, resulting in a tremendous amount of interest and social amplification for our brand and our business. Our winter marketing campaign was our most globally coordinated and integrated to-date and highlighted the freedom and flexibility of the Weight Watchers program with enthusiasm and joy from real members, including Oprah Winfrey who appeared in our U.S. campaign. More people are engaging with Weight Watchers sharing their experiences and inspiring others. Among those is our new Social Media Ambassador, Music Mogul DJ Khaled, who is making a lasting shift to be healthier for himself and for his family. If you haven't seen his Snapchat, where each of his snaps get millions of views, Instagram where he has more than 9 million followers or other social media channels, you need to. His passion, energy and positivity are amazing. Building on this very encouraging start to 2018 and to create the kind of future impact we want Weight Watchers to have, I've asked our global team to focus on three fundamentals which are table stakes for how we work together. First, we will think and act with a global mindset. This isn't about geography. It's about being diversity-minded and integrating our physical and our digital channels everywhere, so our members have a seamless consistent experience no matter how and where they're connecting with us. Second, be brand-led. This means the decisions we make will be guided first and foremost by our purpose. If something doesn't fulfill our purpose, we shouldn't be doing it. And third, human impact will be at the heart of every decision we make. We must honestly assess if what we are doing truly meets both the functional and emotional needs of the people we serve. Underlying everything we do are our tenets, the unique promises we make to all we serve. First, we know you and meet you where you are and this is about personalization and how members experience our brand from greeting them in a meeting, to providing the digital tools that help the program work better for them. By seamlessly integrating tech and data into the member experience, we can help our members achieve their goals, whoever they are, wherever they are. Next, we help you build powerful habits rooted in science. We provide a unique program rooted in and informed by science that is not only about educating people on how to eat healthy and make the right choices, but also how the integration of activity and mindset will more holistically support our members, really deepening the integration of activity and mindset within our physical and digital experiences through the development of capabilities and content, as well as partnering with experts to build an even more engaging experience. And, finally, we enable you to find and form inspired communities. At Weight Watchers, we have always been social, harnessing the power of community to help individuals, who have the same goals form deep, meaningful and real relationships. But this isn't about us building only our community, but inspiring and enabling others to create their own communities based on their personal needs and interests. We want to bring wellness to all people no matter age, gender, ethnicity, lifestyle stage, geographic location or income. Our ambition is to be the health leader for everyone democratizing access to wellness. To achieve that ambition, we'll be making a number of bold moves, which I'll walk you through shortly. But first, I'll hand the call over to Nick to discuss our performance and outlook.

[Nicholas P. Hotchkin:]

Thanks, Mindy. Let me start by highlighting a few key items in our Q4 and full year 2017 financial performance. With the launch of WW Freestyle, global member recruitment trends accelerated bringing our end-of-period subscribers to 3.2 million, up approximately 600,000 or 23% from prior year and exceeding our expectations. Total paid weeks were up 19% year-over-year in Q4 with gains in all of our major geographies. Furthermore, global end-of-period subscribers paid weeks and revenue all grew double-digits in Q4 in both Online and meetings with particular outperformance from Online. Continued momentum throughout 2017 drove a full year total revenue increase of 12% year-over-year on a constant currency basis to $1.3 billion. Higher revenues and operating leverage in our business model flowed through to profitability, and for the year, gross margin rate was 53%, up 270 basis points year-over-year on constant currency and after adjusting for our $13 million Brazil impairment, which I'll discuss later, adjusted operating income of $281 million increased 39% on a constant currency basis. We delivered Q4 GAAP EPS of $0.91, which included an aggregate positive one-time impact of $0.54. Our November guidance implied Q4 EPS in the range of $0.29 to $0.35. With our new program launch accelerating our business momentum in the final weeks of the year, our operating performance came in ahead of our guidance. GAAP EPS for the year was $2.40 up from a $1.03 last year. As detailed in our earnings release, the $2.40 GAAP EPS for 2017 included an aggregate positive one-time impact of $0.75, which reflects a benefit from the new U.S. Tax Law, the cessation of our operations in Spain, the reversal of certain taxes reserves, the Brazil impairment and our refinancing and debt prepayment. Also, note that 2016 EPS included an $0.18 benefit from net tax incentives related to prior year technology investments. To give you a bit more color on the Q4 2017 one-time items, first our GAAP EPS included an $0.82 one-time net tax benefit in Q4 related to the 2017 Tax Act and resulting re-measurement of net deferred tax liabilities. Second, due to the continuing challenging economic environment in Brazil, we recorded a $13 million or $0.19 per share non-cash goodwill impairment charge. And finally, as a result of our successful Q4 debt refinancing, we incurred a one-time charge of $6 million or $0.09 per share related to refinancing fees. Our new $1.54 billion term loan is due in 2024 and our new $300 million senior notes are due in 2025, extending our debt maturities, while maintaining a flexible and pre-payable capital structure. Following the refinancing, we ended the year with $83 million in cash, which included $25 million of borrowings on our $150 million revolving credit facility. Our 2017 adjusted EBITDAS, which excludes the Brazil impairment charge was $337 million and we ended the year at about five times net debt-to-EBITDAS in line with our expectations and down a full two turns from 7.3 times leverage at year end 2016. Turning to 2018, as Mindy mentioned, the response to our new program has been enthusiastic, driving strong member recruitment across all major geographic markets. In fact, on top of double-digit recruitment growth in both 2016 and 2017, year-over-year recruitment growth so far in Q1 is at the highest level we have seen since turning positive in Q4 2015 and it's been especially strong across our online businesses. On a global basis, member average length of stay continues to be more than nine months for members in both meetings and Online plans. And this reflects improvements in the member experience and increasing engagement with tools like Connect, our social media platform embedded in our app. We've also seen success in our longer term commitment plan offerings. Based on the positive response to our program so far, we are expecting another year of solid growth in 2018 and therefore we expect full year 2018 revenue to approach $1.55 billion driven by member recruitment growth, our continued focus on retention, as well as the higher starting subscriber base. And this revenue guidance includes an estimated foreign exchange benefit of roughly $35 million. Based on the top-line growth, we are introducing full year GAAP EPS guidance in the range of $2.40 to $2.70, representing substantial earnings growth compared to 2017 and this year-over-year increase reflects expected continued operating strength as well as an approximately $0.25 per share benefit from the new tax reform versus what EPS would have been under the prior tax policy. The benefit from this lower tax rate will be ongoing and this benefit is offset by higher interest expense this year, which has an approximately $0.30 per share negative impact on EPS in 2018. And this guidance finally assumes about 70 million shares outstanding for the full year. For the remainder of my comments, I'm going to speak to the midpoint of our full year EPS range and on a constant currency basis. So to provide a little bit more color on our revenue forecast. In North America, our largest market, we anticipate full year revenues to be up in the mid-teens. In Continental Europe, we expect full year revenue to be up in the low 20% range and in the UK we expect full year revenue to be up in the mid-teens. In line with our company's new vision, we recently announced our plan to remove all artificial ingredients from products that carry our brand. To contextualize this, such products account for about $17 million or roughly 5% of our total annual revenue. And it's important to note that the implementation of this change is not going to happen overnight. We are working with our partners to reformulate and reimagine products that will replace our existing products and we'll continue to view licenses and partnerships across numerous categories as important long-term opportunities, and Mindy will be talking about some of these more shortly. And for 2018, licensing is about $30 million of revenue in line with the prior year. Gross margin rate is expected to increase approximately 300 basis points in 2018 and this reflects operating leverage and the strength of our online business, partially offset by targeted technology and brand investments that will advance our long-term business momentum. And as we execute on our vision of bringing wellness to all, we intend to expand into new geographies from a position of strength. And to that end, we've decided to close our operations in our legacy meetings-only business in Mexico in the first quarter, which is less than the $1 million in annual revenue. We expect to re-enter Mexico as part of a broader Latin America expansion in the years ahead, but with a fully integrated digital and face-to-face experience. Marketing expense in 2018 is expected to be flat year-over-year as a percent of sales and around $240 million spend. This year-over-year increase is largely due to higher spend on digital marketing initiatives, which have been working well for us and higher than usual spend in the summer months, and Mindy will speak about our global Summer of Impact Campaign, showing how we can be a powerful partner for health in peoples' lives all year long. And note that Q1 is our busiest recruitment period and therefore, it has the highest quarterly marketing spend. For Q1 2018, we expect marketing spend to be in the $100 million range. G&A expense is expected to be down as a percent of sales and to be about $240 million in 2018. This year-over-year increase is primarily due to higher investments in tech and product capabilities and head count to support our growth initiatives in addition to higher equity compensation expense. Below the line, we expect full-year interest expense to be $144 million. This is $113 million in the prior year. And we're currently assuming a tax rate of about 25% for the full year, which reflects our lower rate under the 2017 Tax Act. For the full year, we expect EBITDAS of approximately $450 million, demonstrating the power of our highly cash generative business model. And based on this outlook, we now expect our leverage to be below 3.5 times net debt-to-EBITDAS at the end of 2018, achieving our long-term target ahead of plan. And as we continue to focus on improving our balance sheet and paying down debt, we also plan to make investments in areas such as product, brand, and technology to drive sustained growth. And we could also make small acquisitions which have a good strategic and financially attractive rationale. We expect CapEx, primarily driven by tech spend and capitalized software, to be in the $50 million range with the year-over-year increase primarily due to accelerated tech and product investments and the related expansion of our offices. D&A is expected to be approximately $45 million. Finally, I'd like to discuss our three year goals. By year-end 2020, we want to be helping 10 million people worldwide adopt healthy habits. We aim to have 5 million people in our program and in addition we aim to have 5 million people engaging with us in other ways through experiences such as the Weight Watchers Cruise or engaging with our content while connecting with us on social media. For the full year 2020, we aim to have revenue of more than $2 billion. And as you can see from our expected revenue growth in 2018, which will approach $1.55 billion from $1.3 billion in 2017, we expect the lion's share of our revenue growth to be driven by continued positive member recruitment and solid retention. We plan to continue to manage our cost structure responsibly so that our growth rate of profit exceeds our growth rate of sales. And with that, I'd like to turn it back to Mindy.

[Mindy F. Grossman:]

Thanks, Nick. There's a paradox in the world today. People all over the world want to be healthier. The global wellness economy is now a $3.7 trillion market. But even though people are thinking in a healthier way, they aren't getting healthier. Worldwide obesity has nearly tripled since 1975. As of 2016, more than 1.9 billion adults were overweight. Of this number, 650 million were obese. In the U.S. alone, more than 70% of adults and more than 33% of children are overweight or obese, and the rise in obesity is tied to a decline in life expectancy. In fact, this is the first time life expectancy in the U.S. has declined two years in a row since 1962 and 1963. We can help solve that paradox. People often ask me who our competition is. It's not another company. Our competition is the 90% plus of people believing they can become healthy or lose weight on their own. We want to become their partner of choice, a partner to help them, inspire them and to be part of their journey to lead healthier lives. The world doesn't need another diet. The world needs a leader in wellness and a brand that can bring wellness to everyone, not just a few. That's why the launch of our new purpose and our Impact Manifesto is a big step. Weight Watchers is a community. It's supportive. It's social. It's inspirational. It gives people everything they need to lead healthier lives. To be clear, we aren't changing who we are. We're changing the conversation about what makes us unique and changing mindset, so we can change how the world sees us. Today, healthy is the new skinny. Increasingly people who join Weight Watchers are interested in something more than getting into a size 8 jeans. They want to feel healthy and happy at every size. I do not want to say that they don't care about numbers. They do, but it's not just the number on the scale. They care about keeping their A1c numbers down or their cholesterol counts or lowering their blood pressure. It's about health, activity, and feeling good about oneself. To get there, they want to develop behaviors that will improve their quality of life without having to make drastic changes that aren't realistic or sustainable. The way we show up consistently across the globe is an essential part of how we move forward. Later this year, we'll unveil a new articulation for our brand and we expect to modernize our branding to be even more culturally relevant so we can reach more people in a powerful new way. This evolution will touch every aspect of our brand globally, digitally and physically from product packaging to logos to app design. This will encompass our consumer as well as our health solutions business. To lead this brand evolution, we were recently thrilled to announce that Gail Tifford will be joining us as the company's first Chief Brand Officer. She is joining us from Unilever where she led Media North America and Global Digital Media Innovation. Her global mindset and successful track record of rolling out disruptive technologies in support of a greater brand purpose are tremendous assets as we look towards the future when every consumer and employee touch-point around the world exudes our core brand promise. Attracting and fostering the talent and leadership necessary to advance our purpose and achieve our goals is a key priority. And I'm looking forward to Gail joining our team next week. The new purpose we introduced is just the first step in helping us reach our goals. To achieve the kind of impact we want, we need to make bold business moves to put our vision into place in real tangible ways. I've challenged everyone to think 10 times bolder and to establish Weight Watchers as a true innovator and brand that through its actions can have even greater business and human impact. Our five bold moves are one, become a global purpose-driven brand. In addition to our branding evolution to achieve the impact we want to have in the world, our purpose must guide everything we do. Therefore, we have decided to remove all artificial sweeteners, flavors, colors and preservatives from any product that carries our brands. This will truly enable us to own the idea of what a healthy kitchen can be in products, foods, recipes, content and experiences. As a first move, we have just announced a partnership with FreshRealm, the leading challenger brand in the fresh foods market to create Weight Watchers branded fresh ready-to-cook meal kits and individual products which will be available at grocery retail launching in the U.S. and rolling out in the second half of this year. We will be expanding this type and other fresh food programs globally as well as other healthy kitchen categories. We all know that the first quarter is a great time to engage people in losing weight and getting healthier in the New Year, but if we're truly to become a health and wellness brand, we have to inspire people to be healthier all year long. So in 2018, we're introducing a new campaign globally Summer of Impact and launching in May it will be focused on the power of our program and will celebrate food, family, health and fun, inspiring families and their friends around the world to be healthier. We can be a powerful partner for health in people's lives every day of the year. We also have the capability and responsibility to make communities healthier by making healthy habits accessible to all. That means communities that are underserved. Our science-based evidence proven program can make a social impact and create a social movement to help communities become healthier. Our first campaign will coincide with our Summer of Impact launch. Our second bold move, integrate and unify inside and out. You have Amazon for shopping, Netflix for content, Spotify for music, Weight Watchers should be the world's everything app for wellness. It is essential that our members have a unified Weight Watchers experience, whether it's in a meeting room every week, online at weightwatchers.com or through our app and Connect community. We plan to leverage new tools to make our meetings more integrated with our vision for the future, better utilizing technology to simplify the check-in process and finding other ways to support our team, so they can spend as much time as possible inspiring and coaching our members. Third, personalize all that we do. The idea of personalization certainly isn't new, but it's constantly evolving and to better address the needs of our members, we need a culture that's both data-driven and human-centered. Our mission is to go deeper than we do today and provide members with the deeply human and personal experience and one that truly meets them where they are. Connect is such a powerful platform and we have seen the positive impact on retention. We're continuously enhancing the experience adding video capabilities, notification badges and other features will continue to make the experience even better and keep members engaged longer. Fourth, deepen and expand inspired communities. We know it's easy to build and sustain healthy habits when you do it with others. We see it every day in more than 30,000 meetings a week around the world and with more than 1 million members on average visiting Connect globally every month. But in our future being part of our community won't just mean attending a weekly meeting or posting on Connect, it will mean we give our members new ways to find meeting leaders and others like themselves by life stage goal or location for instance and we'll create new ways for those who haven't tried Weight Watchers to experience our community, WW Cruise is a great example. We're focusing on developing even more ways to share and celebrate and learn from each other and to energize each other, the possibilities there are endless. And finally, number five owning scalable behavior change, consistent with our purpose to inspire healthy habits, it's our intention to bring science and scale not only to weight management, but also increasingly to fitness and positive mindset. We will invest in research areas that bring health and wellness benefits that can't be measured only on the scale. As always we will be guided by where science and consumer insights intersect. We leverage the most fundamental aspects of human nature, awareness social, proof, accountability; the list goes on and on. Our focus will remain not just on what, but on how, that's what scalable behavior change is. To be clear, we are still committed to our state-of-the-art weight management approaches, but we believe we can do even more than that. Not every company can claim it deeply impacts the lives of millions, we can. For 55 years Weight Watchers has inspired people to come together and begin a journey of positive lasting change. The brands of the future have purpose, bring meaning to people, and are integrated through technology into people's lives. That's what I see in Weight Watchers and it's why I joined this amazing company. I truly believe Weight Watchers not only has the opportunity, but has the permission to be a global brand-led human-centric business that through personalization, community and our knowledge of behavioral science touches everyone. Not just people who want to lose weight. We see a future in which we touch every person's life and inspire the families and communities who nurture us. And I believe Weight Watchers can create a world where wellness is accessible to all. So, thanks for joining us on the call today. With that, we'll now turn the call to the operator for Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Alex Fuhrman of Craig-Hallum Capital Group. Please go ahead.

[Alex Joseph Fuhrman:]

Great. Thank you very much for taking my question and congratulations on a really great year. I wanted to ask about a couple of things. One of them was with Connect and I know Mindy you mentioned it in your prepared remarks update, would love to get a sense of how many of your users in the program in North America and globally have interacted with Connect in some way either once ever or on a regular basis and as you think this year's diet fees and it sounds like this was the best recruiting quarter as you've had in quite some time, are the new members using Connect as frequently as your legacy members, are they adapting it as quickly, I'd be curious how your newer members are interacting with Connect?

[Mindy F. Grossman:]

Sure. Thanks, Alex. So, if you think about any member we have, the core foundation of what they have is our app and our technology platform and our access to our tools including Connect. So, the engagement is extremely high globally. What's interesting is, you do see a tremendous amount of new recruits on Connect, because they're looking for support of the community and they're asking questions, they want to get feedback and it's no different when someone new potentially comes in a meeting room, they want the support of those others. So, we're seeing Connect as a great retention tool for people who want to continue to engage, and we have many members who have achieved their original goals, who stay within, because they want to continue the support of the community as well as being able to continue on their health journey. We have been continuing to invest as I mentioned in things like more video sharing, and people being able to form their own communities, we know how important that is. So you will continue to see an evolution within the app, not just only on Connect, but with the entire member journey.

[Alex Joseph Fuhrman:]

That's really helpful. Thanks, Mindy. And does that perhaps explain part of why the online business has been so much stronger, I mean, obviously the meetings business has been strong as well in 2017 and so far. This year the online business has far surpassed it, which was, kind of, the reverse of what we saw in 2016, when this inflection began. Is that somehow being driven by increased usage of Connect, or maybe some meetings members as they leave the meetings, they convert to online just curious, because it seems like...

[Mindy F. Grossman:]

Yeah, I think the reality is the most important device in our life today is our mobile device. And so everyone is going to have that as a constant engagement and we have members who've come in with that and they then have chosen to also go to meetings because they want the physical. And we do believe that online growth will continue to accelerate. But having said that, we're also investing a lot in our meeting experiences, we've changed over the last couple of years, our content to be that much more engaging, our technology tools to be integrated into the experience and we're also looking at certainly diversifying our member base and being relevant to more audience. So, I think you will continue to see the evolution of both. But in today's world, you will expect to see, kind of, mobile adoption to continue to accelerate.

[Nicholas P. Hotchkin:]

I think that's absolutely right. And, Alex, when I look at how we performed in 2017 and how we started 2018, I love the fact that it's global growth. I'm also pleased that it's balanced growth. So, within that 23% increase in end-of-period subscribers at the end of 2017, was online growth higher at 29%? Absolutely, as we'd expect, but the fact that the meeting membership was up 13% also was good to see.

[Alex Joseph Fuhrman:]

Great. That's helpful. And then lastly, if I could just ask about the plan you announced a few weeks ago to offer free memberships to teens who join with their parents over the summer. I mean it sounds like something that could really address a big public health need. You mentioned some of the statistics that are pretty daunting on childhood obesity and how those have tracked the last 10 years or so. What's the feedback been from your own members and your meetings leaders on that? I mean we've seen a wide range of opinions on the Internet from the dietician class, so to speak, ranging all over the place. But how do your community members feel about that?

[Mindy F. Grossman:]

Yeah. Thanks. So number one, I just want to make clear that there's nothing that we would do for our brand and for members and for individuals especially that population that's not rooted in science, that's not been thoughtfully addressed on all issues. So that's the most important thing. We do feel and we do know that when families look to get healthier together, it works, because they have support. Actually the response from internal, and our company and from the field is extremely positive. And by the way, we have had teens as members. This is about letting the family come in, if there's a teen, and we will have very specific parameters around this, who needs healthy habits and a different way of eating, they can come in with an adult. And we'll be announcing the very specifics around this. But it really is meant to be about families getting healthier together.

[Alex Joseph Fuhrman:]

Thank you. That's great to hear. Thank you very much.

[Operator:]

Our next question comes from Kara Anderson of B. Riley FBR. Please go ahead.

[Kara L. Anderson:]

Hi. Good afternoon.

[Mindy F. Grossman:]

Hi.

[Nicholas P. Hotchkin:]

Hi, Kara.

[Kara L. Anderson:]

I'm wondering if you can provide more color on the pathway to grow recruitment off of the 20% revenue growth you're guiding to in FY 2018 that gets you to the $2 billion revenue goal in 2020. Are there new markets definitively built into that expectation or new program iterations like Freestyle that might excite and keep the recruitment momentum going? What are your thoughts?

[Nicholas P. Hotchkin:]

I mean, I'd say, I think we're off to a really good start guiding to revenue approaching $1.55 billion this year, so up almost $250 million from 2017 levels. And that shows the power of combining really great value proposition for consumers and innovation and marketing it well in addition to having leading tech and digital platforms as I think we have. So, I think we're off to a good start and obviously being off to a good start and having a strong 2018 forecast, in the nature of our business model that flows through into 2019 revenue also. I think beyond that, I'd expect the lion's share of our pathway to that $2 billion plus revenue in 2020 to reflect continued focus on driving recruitment growth and increasing retention. But by the same token, we are also very excited about the new geography opportunities, opportunities in the healthcare space, and opportunity to re-energize our products and licensing business. But having such a great response to WW Freestyle and the programs around the world has been a strong start to that three-year goal.

[Kara L. Anderson:]

Great. And then second question for me. Just wondering if you could talk about the response of the Weight Watchers Freestyle program with the male demographic and if you've seen any, I guess, acceleration or interest there.

[Mindy F. Grossman:]

We definitely have seen response. It has worked very aggressively with men. I mean they're having great success within the program, definitely have noticed within Connect more engagement with men. I think you saw in our marketing a lot of diversity within the marketing of real members, including men and women. And as I said before, we're really focused on the broad cross-section of diversity

[Kara L. Anderson:]

Thanks. That's it from me.

[Operator:]

Our next question comes from Frank Camma of Sidoti. Please go ahead.

[Frank Camma:]

Hi, guys, good afternoon.

[Mindy F. Grossman:]

Hey.

[Nicholas P. Hotchkin:]

Hey, Frank.

[Frank Camma:]

How does 5 million target, Nick, that you stated on the member goal, I think, it was 2020. How does that compare with the height of the company, whether online or meetings combined. How does it compare?

[Nicholas P. Hotchkin:]

Yeah. We ended this year with 3.2 million people in the brand, based on – the recruitment growth so far has been the fastest we've seen since Q4 2015 and ahead of the double-digit levels in 2016 and 2017, I could easily see us having comfortably more than 4 million people in the brand when we report our first quarter and I believe a peak number of people in the brand is probably like 4.2 million or so going back to first quarter of 2012, I believe.

[Frank Camma:]

Right. Okay. My other question really on the just the product side, well, first detailed question on the product side. The FreshRealm relationship, so that's not a at-home delivery model, that's purely grocery model?

[Mindy F. Grossman:]

That, yeah, that is quick meal prep, so packaged with all the ingredients and they are separately cooked at home in less than a half hour from our recipes that we've developed over a period of time in grocery. But we think that there's other global opportunities, which we'll be looking at in both the fresh food space and in the evolution of our current products.

[Frank Camma:]

Sure.

[Mindy F. Grossman:]

And this idea of really being authoritative around what connotates a healthy kitchen is an area from a very broad cross-section of product point of view that we think is an opportunity.

[Frank Camma:]

And that's a Q2 event, calendar Q2?

[Mindy F. Grossman:]

No. Actually, the target right now for Fresh is in the third quarter.

[Frank Camma:]

Third quarter. And I guess final question around that, do you own the product, or is that going to be a licensing arrangement where you just get a licensing fee from FreshRealm?

[Mindy F. Grossman:]

That will be a licensing-partnering.

[Frank Camma:]

Okay. So this is one of that levers, you have to bring the licensing back to, I mean, in the heyday this used to be a pretty sizable amount on revenue right?

[Mindy F. Grossman:]

Correct.

[Frank Camma:]

Okay. And so when we think about product sales for 2018, I mean they're still – besides like FreshRealm which you announced, they are still mostly ancillary to the meetings right, so is that how we think about them when we drive that number so that meetings up, product revenue up, other than that, that licensing component? Is that a fair way to say it?

[Mindy F. Grossman:]

So, let me sit back and say what was historical and essentially what we see as opportunity.

[Frank Camma:]

Sure.

[Mindy F. Grossman:]

So, the product sales that we talk about today, for the most part, what you're saying is correct, it's sold within the meeting framework, right.

[Frank Camma:]

Okay.

[Mindy F. Grossman:]

However, where we see the opportunity is to elevate the product certainly that we sell there and make them more consistent with our brand but also to develop partnerships and more products that we can not only have that in that distribution, but in other distribution that makes sense for us.

[Frank Camma:]

Okay. I have a final question if I could. Do you find more and more people using your app on the smartwatches or is that – they're still more using it on the phone? Just curious from a tracking standpoint or is it not as robust for that?

[Mindy F. Grossman:]

Yeah. I would say the predominant utilization is the app. However, we are integrated into smartwatch and we continue to work with our partners relative to what that experience is.

[Frank Camma:]

Okay. Great. Thanks, guys.

[Operator:]

Our next question comes from Greg Badishkanian of Citi. Please go ahead.

[Jesse L. della Penna:]

Hi, This is actually Jesse della Penna on for Greg. Thanks for taking my questions. So, to go back to the online subscribers versus the meeting subscribers, could you just may be talk a little bit about the cost differential you're seeing between each of those, like adding an incremental one?

[Mindy F. Grossman:]

So, Nick can talk to that, I just wanted to say it again. Every member is an online subscriber. That's, kind of, the base of being part of Weight Watchers. And then someone might also aim to, in addition to that, have the meeting experience. So, I just want to make sure when we talk about the bifurcation that's very important around the engagement and then Nick could talk to the monetization.

[Nicholas P. Hotchkin:]

Yeah. When you look at our 270 basis points of gross margin improvement in 2017 and guiding to 300 basis points improvement in 2018, it just shows how well this business model responds to growth, whether it be somebody using our digital tools exclusively or paying a premium to also attend meetings and frankly that's why I am relatively agnostic where somebody chooses to join the incremental economics for us a very favorable as you see in our flow through of top line growth to operating income growth which has comfortably been in the 50% range. We've comfortably been translating a $1 of revenue growth into about $0.50 of operating income growth over the last few quarters.

[Jesse L. della Penna:]

Okay, great. And yeah I think the rest of my other questions were answered so this should be good for me. Thanks.

[Operator:]

Our last question comes from R.J. Hottovy of Morningstar Research. Please go ahead.

[R.J. Hottovy:]

Thanks. Nick, I wanted to follow-up on the three-year target, and take a little bit different perspective, and take a look at the profitability that might be there, obviously there is a lot of leverage in the business model assuming that you hit that $2 billion target, that should show through, there's some upside with the licensing deals you've talked about, but presumably some additional investments on things like technology and other areas. Is there anything structurally that's going to prevent you from getting above the historical numbers around 30% operating margins. Just want to, kind of, flush it out. I know it's probably a bit early and there's a lot of things that still have to play out. But just to, kind of, get a rough sense in terms of what the business model might look under some of the moves you made from a long-term profitability perspective?

[Nicholas P. Hotchkin:]

Yeah. Thanks, R.J. Obviously, certainly as we plan the business we're looking forward rather than back as you'd expect and so we're very focused on driving growth to that $2 billion plus number by 2020. I think we've also been very clear that we'll invest to propel future growth, while also focusing on driving sustainable profitable growth. So, it's important to us that our growth rate of profit exceeds our growth rate of sales and you see that in 2018 guidance with revenue growth being up, approaching 20% to $1.55 billion and our EBITDAS guidance as an example being up by nicely over $100 million. So, you see we're driving profitability as well as revenue growth and we'll continue to do so. And you see that we're investing in marketing dollars and we're reinvesting in G&A dollars and we're investing in CapEx where we have clear business cases and where there are essential moves that we need to do to support our important new brand vision.

[R.J. Hottovy:]

Thanks. And I guess my second question just has to do with the partnerships that you guys are embarking on. Obviously there has been a lot of discussion about the FreshRealm partnership, as well as the Weight Watchers Cruise. But one of the things that came out of the Global Community Event a few weeks back was the idea of finding a partner on the fitness side. Mindy, I just wanted to see, if you had have any early thoughts on that, what kind of form that may take, because that seems like it'd be pretty interesting and perhaps maybe a lot of potential partners that could be out there, just how you see that partnership kind of evolve over the next couple of years?

[Mindy F. Grossman:]

Yeah. So what we've articulated is that, if you think about the food, what you put in your body. First, we unequivocably are going to own that solely. We're going to develop the programs, we're going to own the science, we're going to do the research. That is ours to own. As it relates to activity, we're not going to become a fitness company. So, we believe the integration of activity and prompt and what we can offer will be something that we will do with multiple partners and we're working on that right now. And then on the mindset and mindfulness side, it will probably be a combination of content we develop and integrate as well as partnerships, so that's how we're approaching it and that's what we're in development on right now. And we will test things before we, kind of, move forward into a robust environment.

[R.J. Hottovy:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mindy Grossman for any closing remarks.

[Mindy F. Grossman:]

So, thank you everyone for joining us today, and thanks for your continued interest in the company. And I also want to thank all our global Weight Watchers team for all the incredible work you do in serving and inspiring our millions of members every day. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.